A simple company Act now?

EDITORIAL, TNNJun 1, 2005, 11.06pm IST

The Expert Committee on Company Law (J J Irani Committee) set up by the ministry of company affairs has rightly argued for a compact law containing essential principles, leaving procedural and quantitative aspects to rules.

That will greatly simplify the Act and make it more flexible as changes in rules would not need parliamentary sanction.

The much-needed revamp of the archaic Companies Act has been hanging fire for years because previous attempts have been extremely comprehensive, enabling vested interests to kick up controversies and scuttle things.

In this case, too, the difference in the number of independent directors proposed by Sebi in Clause 49 and the committee could easily be exploited if the endeavour gets bogged down in detail.

A simplified Act ought to lay down only the broad guidelines, leaving the details to relevant regulatory organisations, which would also take care of conflicts arising out of overlap of regulatory responsibilities.

For instance, while the Act could prescribe one-third independent directors, as recommended by the Irani Committee, Sebi could go a step further and prescribe a higher number. The clear establishment of jurisdiction will also impose greater responsibility on the regulator.

However, such a simplification calls for great caution as governing by rules, minus parliamentary scrutiny, has its pitfalls — for one, vested interests could have a greater say than they would in case of a comprehensive Act.

The government has to be very careful in what it takes from the Irani Committee. Its recommendations of mandatory consolidation of accounts certainly merits attention. This will ensure that layers of subsidiaries are not used to dress up accounts, even if a structure with more than two tiers is allowed.

Equally commendable is the proposal requiring MD/CEO/CFO and company secretary to sign financial statements, even if absent.

This will act as a check on accounting frauds as all the signatories would be held accountable. The government now has all the views it wanted. It must act quickly.